Complex structures could increase perception of wrongdoing, warns Chief Auditor in Durand Academy report

Janet Downs's picture
 6
Complex structures adopted by academy trusts led to arrangements which are ‘not always transparent’ and could ‘increase the perception of any wrongdoing’, warned the National Audit Office.

The Chief Auditor investigated the Education Funding Agency’s oversight of related party transactions at Durand Academy Trust and found the way the Trust was set up resulted in a complex web linking the Trust with connected organisations. Some contracts to these linked organisations had been awarded without competition, the NAO found.

Durand Academy was a ‘well-established and successful primary school’ the auditor acknowledged. It had opened a secondary school in 2012 and its controversial secondary boarding school had just opened. The Auditor said he would review the business case for the boarding school in due course following concerns about value for money.

Sir Greg Martin, the executive head of Durand Academy, received a 56.5% pay rise from Durand Academy Trust in 2012/13 (see here). The Department for Education told the NAO it believed head’s pay was a matter for academy trusts but has nevertheless asked EFA to undertake a review of academy heads’ salaries.

The NAO didn’t just report on Durand but on the EFA’s process for reviewing disclosed related party transaction. This was ‘systematic and consistent’, the NAO noted, but ‘initially desk-based and light-touch’. Decisions about whether such transactions were a risky use of public funds were often triggered by whistleblowers or because an academy was already on the EFA register of academies causing concern. There was no ‘routine follow-up’ of academies to make sure all related party transactions were disclosed and the EFA lacked capacity to carry out such checks, the Auditor said.

The EFA had responded to concerns and changed its guidance on related party deals but this had been done on an ad-hoc basis. The Agency had introduced an ‘at cost’ policy for these transactions. But the Public Accounts Committee has already recommended the EFA to reconsider this policy: such deals are ‘always open to accusations of conflicts of interest, even when on a ‘no-profit basis’. The EFA disagreed with PAC – such contracts are ‘acceptable under some circumstances’ if value for money can be shown and the deals comply with ‘relevant accounting standards’.

However, the NAO said it will be difficult to find evidence about whether such transactions are ‘at cost’ or ‘no profit’. The decision may be subjective and difficult to audit especially when the contract is for services rather than for goods. Academy auditors are concerned the EFA ‘at cost’ or ‘no profit’ requirements will be difficult to apply, the NAO said, and it will be a challenge for the EFA to make sure academy auditors can provide an ‘unmodified opinion’ on academies’ financial statements.

In May, I asked if the EFA could cope with monitoring the finances of an ever-growing number of academies. Since then I have found the EFA is expected to cut its operating costs. And now the NAO says the EFA lacks capacity to check on related party transactions which will in any case be difficult to police effectively especially when academy trusts are linked in a complex web of connections.

Although the investigation was about Durand, the NAO said the EFA found 976 academy trusts in 2012/13 had disclosed related party transactions valued at £71m. 54 cases involving £8.6m of public money were assessed as posing a risk to value for money. The EFA found 17 of these cases were ‘irregular’ or ‘improper’. The Guardian has a summary here.
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Comments

R Smith's picture
Tue, 18/11/2014 - 20:55

Janet's excellent report on this story draws attention to how far the EFA (as 'regulator') has teeth and is willing and able to use those teeth.

This is not a story about any random school but one that has been in the public eye, in particular for its plans to establish a so called 'free' boarding school in Sussex. (e.g.:http://www.theguardian.com/education/2014/jun/17/boarding-academy-school... )

The NAO report includes this statement from the EFA:

"Although, in this instance, the Agency carried out a more focused piece of work that sought assurance above and beyond that provided by auditors, resource limitations may impede its ability to carry out such a detailed
 review on an annual basis."

This is really sobering. It positions this bit of 'investigative work' by the Agency not as something that we (the public) should expect from our (very expensive!) regulator but as something done 'by exception' and not to be expected in the future. It took a lot to make this happen. It was only thanks to A) the sustained pressure from whistleblowers and B) the face-to-face inquisition of Peter Lauener by Margaret Hodge in the Public Accounts Committee. (http://www.parliament.uk/business/committees/committees-a-z/commons-sele... )

There are several references to the nature of the regulation provide by EFA being 'light touch'. That has an appealing ring of common sense. Indeed, in general, I would classify myself as someone inclined towards 'light touch' regulation rather than draconian regulation. But this story shows how this can be taken to the point of absurdity. When is regulation so light as to be meaningless? Answer? - read the NAO report.

The NAO report is to be warmly welcomed for shining a light on a school that has structured its affairs into a complex web of organisations bound together by 'related party transactions' that are baffling for anyone to understand let alone audit. One of the areas covered is the remuneration of the Executive Head. This has been much reported (e.g. http://www.dailymail.co.uk/news/article-2832337/Head-230k-extra-cash-run... ) Another of the 'related parties' that the NAO report refers to is the political lobbying and media relations firm PLMR. However, its analysis focuses on the detailed contractual arrangements rather than offering any opinion on the appropriateness of a political lobbying firm playing such a remarkably wide ranging (not to mention costly!) role spanning A) the governance of the Durand Academy B) engineering support from politicians and officials and C) being the mouthpiece for Durand by operating its interface with the media and the public and D) project managing its bizarre venture to set up a weekly boarding school in Sussex.

Readers may well ask themselves: 'what circumstances could explain a school going out of its way to form (in effect) a strategic partnership with an organisation well known for its mastery of political lobbying rather than, say, an organisation that would bring proven expertise in A) boarding provision, B) secondary schooling, C) innovation in education services, or D) project management?'

Do any readers of the Local Schools Network site know of any other schools that have seen fit to form partnerships with political lobbying firms? Does anyone have ideas on what could explain this?

Another interesting feature of the NAO report is that, whilst it covers well possible 'conflicts of interest' within the Durand 'web' of organisations, it makes no mention of what is arguably the most distorting and worrying of all conflicts of interest. I refer to the fact that the DfE and Durand entered into a joint-venture to establish the proposed boarding school. To my mind this seems like a marriage between the regulator and the regulated. Do readers know of similar examples or is this unprecedented?

Janet Downs's picture
Thu, 20/11/2014 - 15:57

R Smith - I, too, raised my eyebrows when I noticed the Auditor had commented on Political Lobbying and PR by Durand Academy. Political lobbying? Is this really an appropriate use of money by a school? This raises the question about how many ministerial mentions, visits to the academy were the result of this lobbying. Not to mention the millions pledged by the DfE for the boarding school.


R Smith's picture
Sat, 22/11/2014 - 10:08

Janet, if you follow this link: http://www.welovead.com/en/works/details/780CjnqD you will find answers to your questions. Page down to read the text description of the campaign. It is well worth viewing the video as well. This is the campaign that won a coveted award. This came not from a panel of educationalist or social innovators but from the PR industry gathered for their annual trade show in Cannes.

More recently, in the comments section under an article, the MD of PLMR has provided further information. He refers to the considerable amount of time ('many hundreds of hours') he has personally devoted to Durand. This piece doesn't state explicitly what the nature of this activity was. One might naively wonder if this was drawing up detailed architectural plans for the new school given it depended on a huge new buildings project. However, this would be odd since that would be the job of Durand's contractors, Balfour Beatty. A clue may be found in the MD's bio that states 'Kevin has secured success at the highest levels of UK and EU Government and Civil Service'.

Janet Downs's picture
Sat, 22/11/2014 - 10:42

Thanks R Smith - my eyebrows rose even higher when I read the political lobbying resulted in:

'23 mentions of Durand in Parliament' .

'Over £2 million worth of print and broadcast media coverage'.

'Durand chosen from Schools across the whole of the UK as the venue for the launch of the Government’s Schools White Paper, November 2010'.

'Praised in Secretary of State’s Speeches on Education Policy in September 2010 20 January 2011'.

'Included in the Departmental Press Release about the first wave of new Academies.'

'Mentioned by Secretary of State in a Radio 5 Live Interview, 1st September 2010.'

All this raises the question about whether ministers were unduly influenced by this political lobbying.

Barry Wise's picture
Fri, 21/11/2014 - 09:04

If you are right Janet and the millions (>£17m) pledged by DfE was won for the school by clever or assiduous political lobbying, then PLMR's fees would appear to offer very good value for money!


Janet Downs's picture
Sat, 22/11/2014 - 10:47

Barry - or it could mean that the DfE is unduly influenced by political lobbying (see my comment and R Smith's comment above) and willing to commit public money to a scheme which was criticised by the NAO.

The NAO has promised to review the business case for Durand boarding school in due course.


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